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A Tiger Of A Mistake

December 10, 2009

by Mario Rizzo

UCLA economist Matthew Kahn says that there is a “natural experiment” of the power of the income effect in Tiger Woods’s troubles (HT Greg Mankiw). The fall in income from endorsements should result in Tiger Woods playing more golf tournaments. The relative price (or wage) from the latter source remains unchanged while his income falls. If leisure is a normal good, then less income means less leisure and hence more tournaments.

Possibly. But it is not a test of the labor supply theory. Why not? Economics makes predictions about markets and not individual behavior. This is a mistake often made by behavioral economists. They (and some of their neoclassical brethren) think that the individual hypothesized in the models is a “representative individual.”

This is quite wrong. As the economist Fritz Machlup argued years ago, the individual here is an imaginary puppet whose only task is to generate predictions about market behavior. (In today’s intellectual landscape we might modify that to include predictions about aggregations of individuals in non-market contexts.)

So whatever Tiger Woods does there has been no “natural experiment” and no test of Jacob Mincer’s labor economics. We can keep Tiger Woods out of the economics books and leave him in the gossip pages.

UPDATE: Tiger Woods says that he will reduce, not increase, his tournament participation. So I guess Jacob Mincer’s labor economics fails the natural experiment. Hmm. Now will Professor Kahn adopt my (Machlupian) point of view?

7 Responses to “A Tiger Of A Mistake”

Kahn’s analysis may be the reverse of the truth. Tiger may play golf only for the endorsement money. After all, endorsements are 90% of his income, golf 10%. If endorsement opportunities dry up, he may lose motivation to play golf. In essence, his golf career would see a 90% drop in income, so leisure would become more attractive.

Good point. Speaking of behavioral economics, someone on my block recently left a copy of Dan Ariely’s book Predictably Irrational on top of a garbage can, so I retrieved it and read the whole thing. What a waste of time. Back in the garbage.
But at least I didn’t have to trade any bernankes for it.

Now Woods says he will quit golf “indefinitely.” Would Kahn say that any part of economics has been falsified? Presumably not. I wonder if he would pledge fealty to some version of “falsifiability” or Popperian philosophy of science. We curtsey to Popper, but we walk with Mises.

It’s more obvious if you include his investment income … Last year he made about $100 mn from endorsements, $10 mn from golf, and if we give him 5% return on his $1 bn fortune, $50 mn from investments. If the endorsements depend on his golf, then golf accounts for $110/$160 = 69% of his income. If endorsements disappear, then golf only accounts for $10/$60 = 17% of his income.

It’s easy to understand someone working full time when it increases his income 200% and adds 10% to his wealth. But will he be so eager to work full time if it only raises his income 20%, and his net worth by 1%?

A rational economics would, I think, say that he should be less eager to work, not more eager, in the second scenario.